Mechanisms to stimulate competition in the EU fertilizer market

Transcription

1 Mechanisms to stimulate competition in the EU fertilizer market IFA International Fertilizer Conference 2015 Nikolay Mizulin Partner nmizulin@mayerbrown.com *all views are personal 30 April 2015 Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe-Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC ); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated legal practices in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. Mayer Brown Consulting (Singapore) Pte. Ltd and its subsidiary, which are affiliated with Mayer Brown, provide customs and trade advisory and consultancy services, not legal services. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

2 EU FERTILIZER MARKET

3 Fertilizer Production Ammonia plant CO 2 Urea Natural gas NH 3 Nitric acid plant Ammonium nitrate (AN) UAN HNO 3 Ammonium variants Air Nitrophosphate plant Calcium ammonium nitrate (CAN) Salts of K, Mg, S Rock Phosphoric acid plant NPK fertlisers H 2 SO 4 H 2 PO 4 Sulphuric acid plant superphosphates Source: Yara fertilizer handbook (2012)

4 EU producers at the high-end of the cost curve Urea cost curve for 2015 Source: CRU Urea market outlook June 2013

5 Price of natural gas in the EU Natural gas prices in EU higher and expected to rise EU prices also dependent on oilindexed Russian gas Production cost of ammonia: Yara Brunsbuttel (EU) =$ 650 per ton Gas Price Forecast, Nominal $/MMBtu Ain Sokhna (Egypt) = $ 100 per ton USA, Henry Hub Russia Germany Saudi Arabia Central Europe Trinidad Source: Ammonia Market Outlook 2013

6 EU is dependent on imports of fertilizers Ammonia, Ammonium variants, and Urea are consumed in large quantities within the EU NPK, UAN, and superphosphates in lower quantities. Production does not cover consumption within the EU On average only 88 per cent of EU fertiliser consumption is supplied by EU production EU production and consumption 2011 Thousand tonnes 20,000 16,000 12,000 8,000 4,000 0 Production Consumption Note: NPK includes NPK, NP compounds and PK compounds Source: CRU Fertilizer Market Outlooks 2013, IFA, FAOstat

7 Insufficient EU capacity Imports are needed Excess demand in the EU is covered by imports Import share of Nitrogen fertilisers in EU-27 Imports of fertilisers containing nitrogen is stable around 20 per cent of consumption Mid-term projections predict EU consumption to be basically constant Note: Consumption includes both agriculture and technical use of nitrogen containing fertilisers Source: Fertilisers Europe 2012 Overview

8 Size of tariffs on imported fertilizers in the EU Product group MFN tariff AMMONIA 5,5% AMMONIUM VARIANTS 6,5% NPK 6,5% UAN 6,5% UREA 6,5% SUPERPHOSPHATES 6,5%

9 Production within EU is concentrated Production is Capital intensive Subject to large economies of scale This naturally leads to high producer concentration 159 fertiliser manufacturing sites in EU-27 owned by few firms Seven largest producers account for 93% of ammonium nitrate capacity in Western Europe Ammonia production in Germany and Poland are highly vertically integrated with Urea production Share of EU capacity held by 4 largest EU producers 2006 Share 70% 60% 50% 40% 30% 20% 10% 0% Source: EU Commission (2007), Large Volume Inorganic Chemicals - Ammonia, Acids and Fertilisers

10 Ammonium Nitrate Prices Inside and Outside the EU Source: the Market by ICIS

11 MECHANISMS TO STIMULATE COMPETITION IN THE EU FERTILIZER MARKET

12 Customs Duty Suspension for Imported Fertilizers EU Customs duties can be suspended or eliminated in the public interest. Customs duty suspensions have been granted in the past on grounds of economic interests of EU users. Customs duty suspension for fertilizers is in the EU s public interest because it would contribute to lowering the cost of agricultural activities in the EU, improve their competitiveness, stimulate the growth of these activities and result in the creation of significant additional employment

13 How will competition be affected? The high international concentration and European market concentration suggest that a tariff removal will have positive effects on competition in the European market Tariffs are higher from countries with no investments in production capacity by European firms Tariffs also affect imports from the USA, where decreasing prices for natural gas will generate competitive cash costs for EU deliveries This suggest a that a tariff suspension will increase competition and create a downward price pressure

14 A fertiliser tariff suspension is beneficial for EU agriculture A tariff suspension will increase competitiveness in downstream industries EU production costs for fertilisers are high High energy and natural gas prices Fertiliser tariffs reduce the competitiveness of EU agriculture Affects the overall European fertiliser market since main sources are subject to high MFN tariffs Adds to the price of existing imports Keeps relatively competitive producers from supplying the EU market Impact on farmers For the average EU wheat farmer a tariff suspension will Reduce cost by 5 EUR per hectare Reduce total operating costs with 1% Reduce total annual operating costs with 181 EUR (based on an average of 36.6 ha per farmer) French wheat farmer Reduce cost by 9 EUR per hectare Reduce total operating costs with 1% Reduce total annual operating costs with 439 EUR (based on an average of 50.5 ha per farmer) Source: Copenhagen Economics 2014

15 EU economic impact of a tariff suspension (Million EUR) Product Surplus for EU fertiliser producers Surplus for EU fertiliser consumers Tariff revenues Total welfare Ammonia Urea UAN Superphosphat es NPK Ammonium variants Total Source: Copenhagen Economics 2014

16 Impact on employment in the agricultural sector A tariff suspension will reduce the costs in downstream industries This increases the international competitiveness of the EU agricultural sector Cost savings in total operating cost approximately 1% due to lower fertiliser prices Lower cost will lead to a larger surplus for consumers Increased agricultural output at the lower prices

17 Estimated employment increase Region Surplus for EU fertiliser consumers (m EUR) Number of jobs created Of which cereal FRANCE ITALY UNITED KINGDOM GERMANY SPAIN Rest of EU EU Source: Copenhagen Economics 2014